Shares in the owner of the Topshop, Topman, Miss Selfridge and HIIT brands have tumbled 16% this morning to below GBP40 for the first time since August last year on the back of a trading update that revealed good sales growth but a squeeze on profit margins from rising freight costs and a slowing of UK growth in the final weeks of June.
At a share price of 3,947.5p, the company is worth GBP4.7bn, only a few million more than AIM’s second-largest (Hutchmed China) – although a comfortable billion or so above its sector rival Boohoo.
Broker Peel Hunt said this fall is creating a good ‘buy the dip’ opportunity for investors.
Following an announcement – where analyst John Stevenson said there seems to be be “the beginnings of a trend in retail announcements landing in line, or with less upgrade momentum and then the share price drops like a stone” – the shares now offer “a great buying opportunity” with the three-to-five-year outlook for ASOS being “compelling”.
The analyst said freight costs rises and delays remain an issue for all retailers, and short-term trading trends for the sector are going to remain volatile, reflecting prior year Covid effects and the stop-start approach to opening up from the global pandemic lockdown.
Stevenson said, “for us, ASOS remains one of most relevant young-fashion platforms, with a huge global potential”.
It is a business with “a well-invested global distribution platform, customer relevant offer, primed for a global recovery in apparel sales”.
Shares that are trading on a low-20s p/e ratio is a “discount to many of the structural growth multi-channel stocks” with a mid single-digit free cash flow yield that “does not capture that market positioning in our view”.
Not everyone was quite so bullish.
Over at UBS, which retained its ‘neutral’ stance on the shares, analysts noted that active customer growth “appears to have been more muted than sales growth during the period”, at an estimated 12.5% year-on-year.
It was also flagged that the company revealed gross margins in the quarter were down 150 basis points, on FX headwinds, freight costs and lockdown product mix.
Also on the downside, UBS highlighted that customer demand has started to shift back to occasion wear over the last few weeks, which might seem positive, but is driving increased return rates.
Danni Hewson at AJ Bell also saw the main theme for ASOS being that it is one of the retailers to lose momentum as the UK reopening gets fully underway.
“Blaming the weather is a poor excuse as June didn’t exactly see biblical levels of rain – and the month is often a wet one, so this year’s downpours were not out of the ordinary,” she said.
“Plenty of people were still able to get out and enjoy the Euro football championships, so ASOS is clutching at straws with its excuses. In fact, if it was digging around for excuses, it missed a trick by not blaming the Euros for distracting shoppers.
Hewson said attributing some of the trading weakness to Covid felt more credible.
“It does feel as the pandemic is rearing its ugly head again, with hundreds of thousands of school children and workers isolating at home.
“People’s social lives continue to be disrupted; for example, music festivals scheduled for after Boris Johnson’s Freedom Day continue to be cancelled as organisers feel there is too much uncertainty to hold a big event. If plans to meet up with friends and family are suddenly scrapped, is there any point in splashing out on new outfits?” she pondered.
“Well, that didn’t stop people during the height of the pandemic, eager to show off their new looks on social media, so perhaps ASOS has temporarily lost its magic touch in terms of selling the clothes people want.”
The current consensus forecast for adjusted profit before tax is GBP198mln for the full year.